• Politics and Policies of Economic Insecurity: Talking to Michael J. Graetz

    Why don’t the 99 percent band together to pursue their shared self-interest? Why should financial elites likewise consider mass economic insecurity the biggest threat to our collective well-being? When I want to ask such questions, I pose them to Michael J. Graetz. This present conversation focuses on Graetz’s book (co-written with Ian Shapiro) The Wolf at the Door: The Menace of Economic Insecurity and How to Fight It. Graetz is a Professor of Law at Columbia University and Professor Emeritus at Yale. He and Shapiro previously authored the widely acclaimed Death by a Thousand Cuts — The Fight over Taxing Inherited Wealth. Graetz’s writing, including his book The Burger Court and the Rise of the Judicial Right (with Linda Greenhouse), has focused on US legal history and problems around economic inequality. In addition to his teaching career, Graetz has held several important positions at the US Treasury department. Graetz has been a Guggenheim Fellow and received an Esquire Magazine award for work in connection with the provision of shelter for homeless people. He is a fellow of the American Academy of Arts and Sciences, and was awarded the Daniel M. Holland Medal by the National Tax Association for outstanding contributions to the study and practice of public finance.

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    ANDY FITCH: So let’s say that, at present, historic levels of inequality (along with disproportionate political influence, and lax tax obligations for America’s wealthiest few) stand out. Why, nonetheless, have you written a book focused on economic insecurity, specifically among the bottom half of American income-earners — rather than on excesses at the very top?

    MICHAEL J. GRAETZ: The public spotlight, as you know, has focused on the top one percent, or even the top 0.1 percent, the “millionaires and billionaires” as Bernie Sanders calls them. The Occupy movement gives a good example, with its rallying cry of: “We are the 99 percent.” But you can’t build a realistic or resilient political coalition this way, because you can’t get 99 percent of the American people to agree on anything. Huge differences, of course, exist within the 99 percent. In this book we argue for shifting the spotlight onto the precarious situations of families in the middle class and below — families who actually haven’t gotten much attention in our public conversations.

    In terms of these families’ foundational economic insecurity, could you start fleshing out this book’s sense of millions of Americans living just one emergency away from disaster? What did that lived experience look like at the start of 2020, and where has it left people now?

    The COVID pandemic has put more of a spotlight on Americans’ everyday challenges and their precarious position in the labor market, in ways that had largely been ignored for some time. In terms of the anger, resentment, and anxiety felt by people at the middle and below, we believe that economic precarity drives today’s situation. For one quick example, when our book came out in February 2020, the US had an unemployment rate of about 3.5 percent, the lowest in 50 years. But even then, more than 40 percent of families in a Federal Reserve survey said that if they had a 400-dollar emergency, they couldn’t pay it off by the end of the month. And the emergencies families face right now are much more than 400 dollars. So focusing on both the politics and policies of economic insecurity has become more important than ever.

    When you look at the behavioral-economics literature, you find two basic principles. First, local inequalities matter much more to most people than what happens with the very wealthy. Most Americans don’t care whether Jeff Bezos has one billion or 100 billion dollars. That difference doesn’t have any immediate impact on their lives. If my law school colleagues find out that the professor down the hall makes 10,000 dollars more than they do, that stings more than the lawyer downtown making 5 million dollars. People tend to compare themselves to others in their peer group, whether that means at their workplace or in their neighborhood.

    Second, the behavioral-economics literature has long confirmed that insecurity matters much more to most of us than inequality, and that we fear losses much more than we value potential gains. I’d note that in his 2016 presidential campaign, Donald Trump never addressed inequality. He actually bragged about being a billionaire. Yet a lot of the most insecure workers ended up voting for him (not all of them by any means, but more than we might have expected). We could say the same thing about Brexit. In both cases, xenophobia and nativism and racism no doubt played a part. We need to address these forces. But we also need to address economic insecurity.

    With that insecurity in mind, you suggest that today’s opportunistic politicians can sense the rhetorical advantage in demonizing “foreigners” (here or abroad), and the popular appeal of protective tariffs (regardless of whether such policies ultimately reduce workers’ purchasing power). You also make the broader historical case that while America’s 20th-century anxieties about Marxist or communist threats helped constrain capitalist excesses (to our collective benefit), we’ve lacked such a disciplining rival for several decades now. So in terms of this book’s broader policy stakes, why should American financial and business elites themselves see populism fueled by economic insecurity as “the wolf at the door” today?

    Starting in the 1970s, imports from Germany and Japan (both emerging from their World War Two devastation) began making inroads into the American economy, and threatening the wages and economic security of our manufacturing workers, particularly in autos, steel, and textiles. Globalization has been a potent political force ever since. Imports from China have had disruptive and sometimes devastating consequences for many local communities — for example, in steel manufacturing in Youngstown, Ohio and furniture manufacturing in Hickory, North Carolina.

    But it appears that the worst US dislocations from the global economy started ebbing about a decade ago. Going forward, US workers will likely face a much greater threat from technology. COVID, of course, will only accelerate the shift to automate more jobs amid a prolonged economic slowdown. With private-sector labor unions having largely collapsed, workers just keep losing ground, both relative to their employers and in having their concerns represented in our legislative politics (where unions used to play a big role). And in term of your question’s second part, about how elites themselves should respond: we largely focus in this book on building and maintaining effective coalitions in the legislative process. We place a lot of emphasis on business leaders recognizing the need for policies that will improve workers’ lives and strengthen their communities — essential aspects of fending off populism in the US today, both from left and right.

    From both sides we see forms of populism attacking expert opinion and urging widely discredited policy measures. This should give both our political and business leaders real pause. In 2016, before the Brexit referendum, the British politician Michael Gove said: “People in this country have had enough of experts.” You get a similar sense in the US today. Trump in many ways echoes George Wallace in blaming “the elites” for this country’s ills. So business interests should recognize that they themselves have much to gain from supporting policies that create good jobs and allow American workers to move much more smoothly from one position to another. Otherwise, I can’t help believing that we’ll see policy responses making the US labor market much less flexible.

    Here could you make the case for why, if we do hope to address individual Americans’ economic insecurity, you ultimately see no alternative to some sort of pro-growth national agenda — fueled by our ongoing cultivation of ever more versatile and nimble labor markets? I’ll follow up on various ways to mitigate the impact of any such classic capitalistic embrace of “creative destruction.” But why might you distrust categorical attempts to abandon that embrace?

    The communist and socialist models have essentially disappeared as attractive rivals. Those models have led to authoritarian government control over the economy. This has succeeded pretty well in China in terms at least of economic growth and lifting millions out of poverty. It has not worked well for Russia. But no appealing alternative to capitalist markets has proven itself, though we definitely can and should build in more constraints, and better protect US workers’ livelihoods and well-being.

    We consider sustained economic growth a crucial component of providing consistent wage increases and creating new jobs — yet not (as some people would hope) with the government itself producing these jobs. The US economy historically has emphasized private-sector jobs. In recent decades, even our federal and state governments have contracted out many of their longstanding functions to private companies. Today our garbage gets picked up by private contractors. Our national defense gets supported by countless private contractors. So it surprises me to see many Americans thinking of government as the employer of last resort (or first resort). Instead, we face this basic question of whether we can make our capitalist economy offer better opportunities and outcomes for workers and their families.

    We’ve seen workers’ rights decline over time, because of federal and state legislation (and Supreme Court decisions) subsequent to the enactment of the Wagner Act, the 1935 National Labor Relations Act. But it would surprise me to see private-sector labor unions return to their former strength, providing a countervailing political and economic force for employees. In our book we look to government for providing social-insurance protections. We write a lot about the need for government to stimulate more job creation, to make low-wage jobs pay better, and to provide sound unemployment insurance and adjustment assistance for people who must change jobs — along with better health-insurance coverage, and more publicly funded child care. We conclude that only government can provide an adequate and reasonably comprehensive safety net.

    Then in terms of political strategy, your book describes the difficulties at present of fusing together a coalition to promote economic growth, address economic insecurity, and reduce wealth inequality — all at once. The Wolf at the Door also provides a persuasive illustration, through its “divide a dollar” thought experiment, for why majoritarian politics seem unlikely to produce durable coalitions, and for why “median voter” approaches (presuming a potentially unifiable majority of “under average” voters) often founder in complex real-world contexts. Here could you make the case for why convergent self-interests alone cannot (or at least often have not) ensured effective coalition building in American politics?

    Our book focuses on legislative politics, not electoral politics. For a long time, the political-science and economics literature has regarded legislators as appealing to the median voter — typically measured in terms of income. But we show that, in addition to core economic interests, voters (and legislators) always have other concerns they care about. As soon as you introduce additional dimensions (whether nativism, abortion, or protectionism, or really any topic), the supposed median voter shifts. So we need a more practical lens to see how legislators and coalitions approach politics.

    The alternative lens through which this book looks at legislative politics comes out of the divide-a-dollar game. You can play it at home [Laughter]. You just need three people. Ask them to divide a dollar by majority vote. You’ll quickly find that no stable solution arises. Someone says: “Let’s divide it three ways.” But somebody else immediately says: “No. Let’s you and I split it 50-50.” Then the person left out offers a 40-60 split [Laughter], and it just goes on and on. Self-interest alone, either in this game or in American democracy, cannot create a sustainable program benefitting the vast majority over time. Instead we need to create coalitions.

    For this book’s methods of effective coalition building, could you first describe the significance of providing a compelling moral vision, to make policy implementation’s long-term slog more endurable?

    Anyone who has experience with the legislative process knows the crucial importance of coalitions. Ian Shapiro and I give some examples in the book. We wrote an earlier book on the coalition that repealed America’s most progressive tax, the estate tax. This tax only affects the very, very wealthy, but an unexpectedly broad coalition coalesced to oppose it. This included a majority of the Congressional Black Caucus, to Bill Clinton’s great surprise. It included a lot of women small-business owners. It included many gays and lesbians who at that time lacked the legal protections (and the estate-tax benefits) that marriage provides.

    In order to keep an effective coalition together, and to block opposing coalitions from breaking it up (given the inherent instability demonstrated through the divide-a-dollar game), you need a moral commitment (although different members of the coalition may in fact have different moral commitments). People need to be motivated by some principle other than just their own self-interest.

    In terms then of such a coalition also pursuing proximate goals (in part to help hold itself together), could we compare roughly contemporaneous Tea Party and Occupy mobilizations in 21st-century America? Even if, from a partisan perspective, one side comes across here as “reactive,” and the other as “visionary,” why does only the Tea Party end up, in your account, harnessing its political momentum towards substantive legislative and judicial impact on our national politics?

    When New York City agreed to wrap a fence around the large bull statue sitting at the foot of Wall Street, Occupy protesters declared that a victory [Laughter]. Occupy made quite clear that it valued having no leaders and no organizational hierarchy. It also did generate a lot of support. People camped out on greens or in city centers all across the country. But once the winter weather came, those encampments predictably tended to scatter. These groups didn’t have proximate goals to start with, so they inevitably dispersed.

    Proximate goals may sound too tentative, but they provide the glue that holds a coalition together. Our book discusses, for instance, the early-19th-century decision by Britain to abandon the slave trade — rather than to abolish slavery. Eliminating the slave trade offered a crucial step on the way to eliminating slavery a generation later.

    For one illuminating instance from our more recent past of assembling effective coalitional politics (here especially through institutional commitments and compelling moral rationales), could you describe what Bill Clinton’s presidency got right in its push for broadly distributed homeownership as a means of reducing racialized wealth gaps and related inequities? And then could you describe why this particular push (really involving at least three consecutive presidential administrations) nonetheless ends up anchoring your “Good Politics, Wrong Policy” chapter?

    Yes I’d mention here Bill Clinton and also the two Bush presidents preceding and following him. All three prioritized expanding homeownership to a level far beyond historical norms — particularly by allowing low-income workers to own their own homes, rather than rent. Implementing this shift as a national policy required that lenders reduce the usual reliance on screening families for their ability to pay off their mortgages. So long as Clinton presided over a burst of economic growth and rising housing prices in the late 1990s, this policy seemed to work fine. But once housing values took a downturn and people couldn’t pay their mortgages, the whole arrangement faced huge difficulties in enabling families to stay in those homes. Both their economic and their psychological well-being suffered as a result of foreclosures. Joshua Rosner put it well when he said that in a downturn of housing prices, it doesn’t matter much whether a landlord evicts you or a bank lender evicts you.

    A number of people saw this coming, and warned of the consequences. Robert Shiller essentially received a Nobel Prize for his warnings. He and others made powerful arguments that the only real solution required writing down the mortgage principal in relation to these houses’ decreased value. But this idea, as you know, directly led to Rick Santelli’s rant on the Chicago Mercantile Exchange, and his famous words: “Let’s start a Tea Party.” As that huge backlash erupted, it became politically impossible to write down the mortgages. Many folks quickly concurred: “How can you write down the mortgage for this irresponsible borrower, and not do the same for the people who pay their mortgages?” A legitimate moral-hazard problem arose, with no easy political way out of it. The rhetoric of homeownership, which sounds so American and apple pie and often makes for good politics, led to the wrong policy.

    So again, your book prioritizes not the economic needs of the 99 percent, but of “people who are nowhere near the top tier and never will be.” And your book seeks to address this group’s vulnerabilities from a realistic perspective, acknowledging that the “good old days” (at least for some of us) of secure and sustaining occupations largely won’t be coming back. Here some politicians and policymakers might propose legislated living wages, or universal basic incomes, as the best way to ensure American workers’ well-being. But what directs you instead to Earned Income Tax Credit expansions? What makes the moral rationale, the funding structure, and/or the long-term political viability of EITC-style policies preferable for a future with, perhaps, significantly less need for certain forms of human labor?

    Richard Nixon, in the early 1970s, proposed essentially a universal basic income, which he called the Family Assistance Plan. It passed in the House, but a coalition of conservative Republicans (who didn’t want any such thing in America) and the most liberal Democrats (who considered the amount too small) defeated it in the Senate.

    Today, some liberals want to add a universal basic income to existing safety-net programs, but conservatives who support a UBI want to use it to replace all other social-protection programs, including Social Security, Medicare, and Medicaid. Many on both sides oppose a UBI because it doesn’t require work and gives money to surfers and layabouts. These opposing forces will never get together to enact a UBI.

    Contrast that to the Earned Income Tax Credit, a refundable tax credit (which means you can get it even if you don’t owe taxes) providing a wage subsidy for low-income workers, particularly low-income workers with children. This program started out small in the 1970s, but both Republican and Democratic administrations have increased its size. And many individual states also now add to it, making it even more valuable for low-wage working families.

    I like to quote Bob Greenstein, head of the Center on Budget and Policy Priorities, an organization that probably has done more for the economic advancement of low-income workers than any other in the country. Greenstein says: “When you get an opportunity to take two steps forward, you should take them. And when the pendulum swings, as it inevitably does in American politics, try to go only a half-step backwards.” While calls for universal basic income and Medicare for All may work in electoral politics, they lose their power in legislative politics, because they don’t point to proximate goals. You need to know how you’ll get there step-by-step. You also need to design policy so that your proximate gains get entrenched for the long term.

    In order to get Southern Democrats’ votes, FDR had to exclude agricultural and domestic workers from Social Security, to satisfy racists. One can argue that FDR never should have agreed to this. But along the way, he created a system that over time could be extended to cover those workers. FDR also created a Social Security financing structure that’s hard to dismantle. When George W. Bush wanted to privatize Social Security, policymakers had no good option for funding that shift. To shut down Social Security, they would have to provide benefits both for today’s elderly, and for current workers’ private accounts. But that would require current workers to pay twice, which of course is not feasible. So Social Security still offers the gold standard for entrenching proximate gains.

    Job displacement during an American’s prime working years exposes, your book suggests, the weakest point in our economic-security net. What useful precedent do US Trade Adjustment Assistance policies provide for how best to help adult Americans regain their occupational footing? And given prospects for permanent automation-driven shifts in the US labor market, for there to be no solid job to land even once you’ve had some time to retrain, what should Universal Adjustment Assistance look like today?

    First, our unemployment-insurance system is now 85 years old, and was designed in response to archaic constitutional constraints that FDR thought he had to work around. COVID-19 has revealed how inadequate that system is. Congress already has had to design a new unemployment-insurance system because the 50 state-based systems don’t cover temporary or part-time workers, or independent contractors. Economists have estimated that these categories of workers account for 95 percent of all new jobs created between 2005 and 2015. And if you’re a low- or moderate-wage worker, state unemployment benefits frequently don’t provide enough to protect your family from poverty.

    The Trade Adjustment Assistance Program, started during the Kennedy administration, has also failed. It focused on US workers in industries facing competition from imports. Certain workers losing jobs in these industries could supposedly get support to retrain for new occupations or to relocate. But LBJ didn’t follow up on this program — not one request for Trade Adjustment Assistance was approved between 1962 and 1969. Jimmy Carter rejected proposals to expand and overhaul the program. Reagan cut it back. Clinton tried to expand it when he signed NAFTA, but it still covered only a handful of workers. Congress never appropriated adequate funds. Other countries literally spend 5 to 15 times more than the US in assisting their displaced workers.

    So our book calls for “Universal Adjustment Assistance.” UAA would combine unemployment insurance with occupational-adjustment assistance, for all workers who lose jobs through no fault of their own: whether due to trade or automation or some other reason, such as the current pandemic. We consider it essential to recognize that these people want to work. Congress shouldn’t worry about a large number of potential workers just sitting around collecting unemployment insurance. American workers crave the dignity of a meaningful job.

    Younger workers just entering the labor force today can expect to change jobs 12 or 15 times. A Columbia or Yale grad may regard this as an opportunity. They’ll happily move on to the next job and see what it offers. This kind of switch doesn’t frighten them. But for somebody with a high-school education (or even many college degrees) and a family to support, those statistics are frightening — posing threats to one’s livelihood and dignity. We strongly support Universal Adjustment Assistance for these workers as they navigate the 21st-century labor market.

    In many instances, future job changes might require more education. For that, we would rely heavily on community colleges, which have had significant success in training adults for emerging jobs. We also would provide support (financial and otherwise) to help workers relocate to communities with more robust economies. This need has taken on new importance as American workers now appear to be more rooted to their local community than ever before. Given our country’s uneven economic prosperity, workers need greater support to seek out new opportunities. And we need business support to accomplish these goals — again with businesses themselves benefitting more by finding high-quality workers than by claiming tariff protections that end up costing hundreds of thousands more jobs than they create.

    Again, if we abandon the assumption that a good job (dispelling economic insecurity) awaits workers at the end of the adjustment tunnel, what kinds of policy provisions do we need around, say, healthcare — in order to facilitate American labor-market dynamism, while also shoring up individual economic security? Could you describe, for example, how and why a gradual Medicare opt-in approach (over a generation) might now offer our best prospects for the kind of market-reinvigorating public option that the Affordable Care Act failed to deliver?

    Let me start with the historical accident of how wage controls imposed during World War Two have shaped our national healthcare policies ever since. With those wage controls in place, employers seeking to attract workers found it increasingly useful to provide benefits (including important health benefits) that employees came to rely on. But that wartime arrangement shouldn’t make it forever impossible for the US to move away from employer-based health insurance. The pandemic has revealed how costly relying on employers for health coverage can be. Obamacare sought to make markets for individual insurance more competitive, and to provide subsidies to help Americans buy insurance. But this emphasis on individuals obtaining private insurance took away chances for cost control. One great advantage of Medicare comes from how its massive buying power can help to keep prices under control, even when costs for providing care are rising.

    But Medicare only covers the most expensive part of the US population: people over 65. There have been many proposals to expand Medicare by including people at age 60 or even 55. But these groups won’t produce the kinds of insurance pools that save you much money. So our proposal, which we call “Medicare from the bottom up,” lets younger workers opt into the Medicare system. This will create a much broader and healthier risk pool for Medicare. We could start, say, with people under age 35. Then, after a few years, include everybody up to age 40, and then 45, and so forth. Over a generation, everybody will receive a chance to opt in. We consider that proposal more far-reaching than the public-option alternative that the insurance industry defeated by one vote during Obamacare’s passage.

    If, however, Congress now could pass a public option, we would regard that as a useful step along the way. Either a gradual opt-in or a robust public option offer the kinds of proximate goals we need, rather than Medicare for All. In the Democratic primaries, Bernie Sanders never said how he would pass or pay for that, or even how much it would cost. And when Elizabeth Warren tried to explain her own plan’s details, she never recovered. But our opt-in plan wouldn’t face similar obstacles. It would require a longer phase-in than we might like, but it has the advantage of being realistic.

    Could you offer an equivalent case for pursuing a wide array of public-private infrastructure initiatives, rather than for codifying government jobs guarantees? Which perennial political constraints make major infrastructure investments particularly challenging to carry out, even when all sides agree that we need them? Which financial circumstances make long-term investment seem in fact quite feasible today? And how would you hope to see such public-private partnerships prevent any unidirectional draining of public resources and revenue?

    People on the left have proposed that government serve as employer of last resort, providing jobs with at least a 15-dollar minimum wage and robust benefits, for anybody who can’t find private-sector work. We don’t regard that as realistic. Even FDR, during the Depression, didn’t go this far, although his Works Progress Administration did produce huge numbers of infrastructure projects: ranging from roads to bridges to dams and electrical systems, and also playgrounds, parks, and school buildings. From FDR’s legacy, we also know that infrastructure investments create many jobs, including jobs not directly tied to  building and maintaining the infrastructure.

    One good example comes from the light-rail system built to connect Denver’s airport to its downtown. Along the way, with the rebuilding of Denver’s Union Station, this infrastructure project completely transformed the downtown into a desirable area for commercial activity and residential living. That came out of a public-private partnership. And if you start from the facts that the American Society of Civil Engineers has graded today’s US infrastructure a D-plus, and that both Democrats and Republicans have recently proposed infrastructure bills, you have to wonder why we’ve had such a holdup. But over time America’s anti-tax movement has allowed very little in increases to the federal gas tax to help pay for bridges, roads, and mass transit. That tax hasn’t increased since the Clinton administration, even though labor and material costs have doubled since then.

    The Obama administration innovated by creating Build America Bonds, an alternative to tax-exempt state and local bonds — as a way of getting pension and sovereign-wealth funds (and entities like university endowments) to buy state and local bonds, in addition to corporate bonds. This lasted a short while. And then, for reasons still mysterious to me [Laughter], Republicans decided that we needed to return to state and local governments issuing only tax-exempt bonds.

    Public-private partnerships provide another workable alternative. Our book draws on a number of successful examples. LaGuardia Airport’s central terminal, which numerous officials including Joe Biden described as a national embarrassment, has now been modernized. It had been forecast, before the pandemic, to produce 5 billion dollars of additional economic activity. The Port Authority of New York worried about construction overruns, but it shifted these risks of cost increases (for design, building, maintenance, and operations) to a public-private partnership. Much of the risks fell on private parties, who in turn received significant concessions on commercial rents — increasingly important since American airports have become shopping malls, with people stuck there so long.

    The Port of Miami shifted a lot of its risks and costs of reconstruction to cruise lines. The cruise ships pay more to dock than freight carriers. This seemed like a smart idea when announced, although again, now with COVID-19, only time will tell. But in any case, it was probably better to have significant investment risks fall on private parties.

    Beyond transportation, building out rural broadband and modernizing energy-production facilities offer two of many potential examples for working with private parties to upgrade public infrastructure. You always need to sort out who takes on which risks, and which responsibilities, and receives what in return. Public authorities need to select projects carefully, and to require genuine competitive bidding.

    Our book also discusses some failed public-private partnerships, such as the privatization of Chicago’s parking meters. Mayor Richard M. Daley wanted to avoid a property-tax increase, so instead he sold the parking meters for a song to a private group. That group not only quickly recouped its investment and started making profits, but now has another 65 years of owning these meters. That example stands out as a disaster for city revenues over the long haul.

    In order to get infrastructure proposals passed, either at the state or federal level, you typically need to present a broad package of projects that interests both urban and rural constituencies. Our “Waiting for Infrastructure” chapter title might play off Samuel Beckett’s Waiting for Godot [Laughter], but we remain optimists. We believe that major infrastructure improvements will occur at some point. We do our best to illustrate how that might happen.

    Well still with such infrastructure projects in mind, your book’s skepticism regarding certain place-based stimulus approaches stems from concerns that these initiatives often fail to assist the specific struggling people associated with a given place (instead trigging gentrification), or that even when such initiatives do help “locals,” this assistance typically gets directed towards entrenched incumbent (potentially outdated) firms, rather than towards dynamic new enterprises. So again, particularly in an era of global competition and of capital-intensive (rather than labor-intensive) production, what does seem most feasible to you in promoting the longer-term transformation of industrially displaced communities?

    Place-based incentives historically have derived from problematic trickle-down policy approaches. The Clinton administration’s enterprise zones gave tax breaks to investors, often without helping disadvantaged local populations. More recently, Trump’s 2017 tax cuts established thousands of “opportunity zones” across the country. These allow investors to avoid capital-gains taxes — potentially forever, if their gains are invested in opportunity zones. In both models, problems arise with displacements of people inside or just outside these zones. Gentrification frequently occurs, and jobs sometimes get sucked away from equally distressed adjacent areas.

    The places that qualify tend to get selected for their political value to the governor (or other politician who picks them). Oakland’s football team is now moving to Las Vegas and building its new stadium in an opportunity zone, which clearly no longer needs that kind of added investment incentive. Long Island City for some reason qualifies as an opportunity zone. The benefits will be captured by the richest people who can invest the most — often in real estate, not factories.

    Today’s distressed American communities frequently face dislocations produced by imports, and sometimes automation. We cannot realistically expect certain industries to bounce back and employ anywhere near as many workers as they once did. But presidential candidates always stop in Youngstown, Ohio, to make promises of a massive recovery. Youngstown had a thriving steel industry until a sharp decline in the 1970s, when it couldn’t compete with Japanese imports. Youngstown has never successfully revitalized since then. It does have successful steel plants, but a leading French-owned plant, for example, relies on only about 300 employees (a tiny fraction compared to the previous workforce), alongside robots producing rolls of steel.

    Our book compares Youngstown, Ohio to Allentown, Pennsylvania. Allentown has successfully transformed its local community, moving away from steel production, and creating many new jobs based in the health and education industries. Allentown had the will and leadership necessary to change. Hickory, North Carolina likewise shifted from mass furniture manufacturing with lots of employees to custom upholstery and furniture production. Eventually Hickory refurbished its downtown office buildings and facilities, and attracted technology firms to the city.

    These communities have had to make tough decisions. Political leaders have had to envision and address broad economic and often cultural change. You hear a lot of nostalgia when people contrast today’s inequality to the Great Compression during the decades immediately following World War Two. But the clock doesn’t run backwards. Nothing will take us back to the post-World War Two years when the US had most of the world’s wealth and power. We have to adapt and innovate. Successfully revitalized communities have had governments and business networks and local activists willing to lead. Without such commitments, state-based programs for particular communities, or federal programs like enterprise and opportunity zones, have largely thrown good money after bad ideas — and to the wrong people.

    Some excellent economists argue now for more place-based policies. Adjusting earnings credits for certain communities, based on their local wages and costs of living, might help to address those communities’ displacements, at least temporarily. But my co-author Ian Shapiro and I have concluded, after taking a careful look, that such an approach needs to rely on localities first, states second, and top-down federal approaches a distant third.

    In terms then of tax policy, could you first sketch the parameters of what you consider realistic approaches to rethinking American taxation? What would it mean, and what would it take, for Republicans to renounce a “starve the beast” strategy with tax revenues that has failed so strikingly (at least at the policy level) for decades now? And why do Democrats need to move beyond their more recent fixation on just taxing “the one percent” or “the ultra-rich” or “business”?

    I’m now working on a book about the history of the anti-tax movement, and its impact on the Republican Party and the nation. So I’ll have more to say on this topic after I finish that project. But Democrats have essentially surrendered to the anti-taxers. Even to fund important protections for low- and moderate-income families, Democrats only seem willing to increase taxes on the rich. When President Obama had the opportunity to raise taxes without having to do anything, simply by letting certain temporary tax cuts expire, that didn’t happen. During the Democrats’ 2020 presidential primary, Bernie Sanders castigated the billionaires, and Elizabeth Warren recommended a tax for people with more than 50 million dollars of wealth — which still provided a pretty rare target [Laughter]. This would raise money, but not nearly enough.

    Many different tax reforms, both on the individual side and on the business side, would help. We tax dividends at a low rate now. When the corporate rate dropped in 2017, Congress didn’t enact a corresponding increase in dividend rates. We had taxed dividends at a top rate of 20 percent, and corporations at 35 percent. The Trump administration lowered corporate rates to 21 percent, but didn’t raise dividends back to the rate on ordinary income. Many other examples stand out — such as the fact that you can escape capital-gains taxes by holding onto assets until death. The carried-interest loophole needs to be closed. Congress could easily close estate-tax loopholes. A low-rate financial-transaction tax might make sense if we could get the Europeans and Japan to go along. That would raise significant revenue even at very low rates.

    The US now has its largest national debt (as a percentage of the economy) since the end of World War Two. The pandemic has added several trillion dollars in temporary spending. But if you look at the gap between our spending and our revenues, you see that we need to do something about the tax system. The Canadians have solved this problem pretty well while not relying as heavily on income tax — instead enacting a national sales tax (in the form of a value-added tax), and providing benefits that make this overall system progressive.

    The US now ranks as the OECD’s lowest-taxed country (formerly Mexico and Brazil were lower). The federal tax system collects 16 to 17 percent of GDP, while government spending is 21 or 22 percent. We need to close that gap. At the same time, to protect middle- and lower-income workers and their families, we will need more government spending, not less. We’ll also likely face an escalating concern with federal debt levels by around 2025. During this COVID-19 crisis, we don’t want to raise taxes. We need fiscal support for the economy. But at the end of 2025, when Trump’s tax cuts for individuals expire, we’ll need a different approach. We may need it sooner. Congress must address these issues sooner or later.

    So in terms of something like a broadly applicable value-added tax, what further moral case might you make to left-leaning Americans for at times embracing tax structures that are not progressive, in order to fund crucial progressive public investments and initiatives?

    I’ve been arguing for years that we need a value-added tax. You can remove 150 million people from paying income tax if you enact a value-added tax. I’ve had a proposal to do that circulating for a long time. Senator Ben Cardin from Maryland, who is on the Finance Committee, has introduced a closely related bill.

    I do not recommend simply imposing a value-added tax, with no changes to existing income taxes. But a value-added tax can play an important role in an overall progressive reform. Again, US history provides a helpful analog. Let me use FDR’s debate with his Labor Secretary Frances Perkins (a brilliant policymaker and the first woman cabinet secretary) about the Social Security tax. Perkins said something like: “You need to make this tax to fund Social Security progressive.” Roosevelt replied: “No. I’ll put a tax on wages, and people will see that as their contributions to a self-sustaining system for everybody’s retirement security. No damn politician will ever be able to get rid of that.” And he was right.

    So we have a regressive payroll tax funding our Social Security system. But if you consider the taxes and benefits together, you find an overall progressive program. Some people want to make this program even more progressive. The tax ceiling certainly hasn’t risen nearly as fast as wages at the top have grown. So we need to modernize the Social Security tax structure and our even more regressive unemployment tax. But sometimes a tax that is not itself progressive, like a value-added tax (again, while retaining the income and estate taxes for high earners and the wealthy), can provide the best opportunity for more progressive policy.

    At least 165 countries now have value-added taxes. And these taxes work well to fund government programs, even in countries with poor revenue-administration systems. So this is no ivory-tower fantasy. There are 50 years of experience with value-added taxes around the world. I believe that the US ultimately will see this tax as inevitable. I just can’t tell you when.

     

    Top image of Michael J. Graetz by Lucas Field.
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